The present storm battering stock markets has led the authorities that oversee Germany’s bourse to adopt a more flexible method for evaluating the stock portfolios of insurance companies in applying HGB accounting standards. According to a report in Financial Times Deutschland, the new rules, announced last Wednesday, oblige insurance companies to write off investments in shares against shareholders’ capital or profits if the value of these shares had fallen by at least 20 percent six months before the publication of financial statements, or if the average value of shares had fallen by at least 10 percent in the 12 months before the publication of the financial statements. The measure is obviously designed to boost the standing of firms, recognizing the particularly adverse impact of global stock markets on their finances. The new rules, which do not cover the companies following US or international accounting principles, nevertheless also are a measure to protect the credibility of the system. German – and European insurance companies generally – maintain about one-fifth of their investments in stocks in order to achieve higher returns than those from lower-risk placements. This is considered necessary for them to meet their obligations on maturing life policies with guaranteed returns, which on average stand at a minimum of 3.5 percent. The problems faced by the insurance industry worldwide can now be attributed to two main factors. The first is the state of stock markets, given the huge dependence of companies on such investments, which is to be expected. The second is the fall in production investment-linked policies in the life sector, resulting from the negative state of the markets. As regards European – mainly German and Swiss – insurance companies, the situation has been made worse by the huge losses caused by the recent floods in much of central Europe. Several companies in Germany are facing an acute liquidity problem and are not in a position to fully meet obligations to clients. The German Insurance Companies’ Association, said the FTD report, is now trying to create a «support fund» for firms with liquidity problems due to the shrinking value of their investment portfolios. Greek insurance companies are facing exactly the same problems, but these only added to an already serious situation. Most firms’ reserves are much below the required levels, which means they cannot meet future obligations, while the authorities keep ignoring the problem, true to their usual policy. As abroad, investment portfolios have suffered huge losses when sales have also plummeted. Additionally, however, Greek insurance firms face the difficult problem of high operating costs and expenses, largely the result of the practice during the heyday of the stock market three years ago to spend generously on expanding sales networks through acquisitions of doubtful value. The trend now is of cutbacks and cost reduction but this will neither be easy nor fast. The possibility of writing off losses in investment portfolios against shareholders’ funds has been a good way out for many companies over the last financial year. But at a time when firms cannot make profits and many are short of capital, it is especially difficult for them to resort again to the same practice. When even big banks are finding it difficult to improve their net worth and resort to bond issues or seek new ways of boosting their equity capital, it is very easy for the firms of a more problematic sector, such as insurance, to hit red. Raising capital on the market under present conditions is impossible. Due to the problems set out above, liquidity has dried up. In the meantime, old policies, signed at a time when the industry really started taking off in Greece in the early 1980s, are now maturing, causing an additional drain on resources. Such problems are common for almost all companies. The subsidiaries of banks, the biggest players in the insurance market, can be relatively assured that their parent companies will, sooner or later, be called on to provide a lifeline, no matter how much the responsible government departments turn a blind eye. But in the private companies, the shareholders will have to dig deep into their pockets, unless the market turns around quickly. At any rate, analysts in Europe take the view that if the crisis lasts another month, problems can be dealt with, but if it lasts more, we must brace ourselves for big bankruptcies.